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Sept. 18, 2020, 1:49 p.m. EDT

Billionaire investor Ray Dalio on capitalism’s crisis: The world is going to change ‘in shocking ways’ in the next five years

Veteran hedge-fund manager says capitalists don’t divide the economic pie well, so the system isn’t working effectively for all

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By Jonathan Burton, MarketWatch


Bloomberg
Ray Dalio, founder of Bridgewater Associates LP, the world’s largest hedge-fund firm.

Ray Dalio certainly is no radical idealist, but in his frequent writings and media appearances the veteran investor consistently calls for Americans to rewrite their longstanding contract with capitalism so that it is fairer and more generous to more people.

Otherwise, he predicts, life in the U.S. could become more difficult: mountainous debt that stunts economic growth; fewer opportunities for ordinary citizens to get ahead financially; and a worldwide lack of trust in the U.S. dollar that diminishes Americans’ purchasing power and could lower their standard of living.

Dalio is the founder of Bridgewater Associates, the world’s largest hedge-fund firm, which has made him a billionaire. So it’s not surprising that he champions capitalism as a proven way to expand economic growth and living standards.

“Capitalism and capitalists are good at increasing and producing productivity to increase the size of the economic pie,” he says.

Then Dalio stands this tenet on its head. Capitalists don’t divide the economic pie very well, he says, and so today the capitalist system, the foundation of the U.S. economy, is not working efficiently and effectively enough for all.

“Capitalism also produces large wealth gaps that produce opportunity gaps, which threaten the system,” Dalio says — a system that has been and still is key to the health and success of U.S. business, workers, government and investors alike.

Unless the U.S. takes steps to make systemic repairs designed to provide greater opportunity for more Americans to achieve personal growth and financial security, the consequences likely will be painful for the country, as Dalio explains in this recent telephone interview, which has been edited for length and clarity:

MarketWatch: You have written and spoken about three big domestic and international problems facing the U.S. over the next five to 10 years and how a failure to address these challenges could threaten America’s standing in the world. What are these three pressing problems?

Ray Dalio: I look at it mechanically, like a doctor looking at a disease. If asked what is the issue here, I would say that it is a certain type of disease that has certain patterns which are timeless and universal, and the United States is broadly following that progression.

There are three problems that are coming together, so it’s important to understand them individually and how they collectively make a bigger problem.

There is a money and credit cycle problem, a wealth and values gap problem, and an emerging great power challenging the existing dominant power problem. What’s going on is an economic downturn together with a large wealth gap and the rising power of China challenging the existing power of the United States.

It’s a fact that there has been a weakening of the competitive advantages of the United States over the last couple of decades. For example, the United States lost a lot of the education advantage relative to other countries, our share of world GDP is reduced, the wealth gap has increased which has contributed to our political and social polarization.

But we haven’t lost all of our competitive advantages. For example in innovation and technology, the United States is still the strongest, but China is coming on very strong and at existing rates will surpass the United States. Militarily, the U.S. is stronger but China also has come on very strong and is probably stronger in the waters close to China that include Taiwan and other disputed areas. Finances for both countries are challenging, but for the U.S. more so. The U.S. is in the late stages of a debt cycle and money cycle in which we’re producing a lot of debt and printing a lot of money. That’s a problem. As a reserve currency status, the U.S. dollar /zigman2/quotes/210598269/delayed DXY +0.01%  is still dominant though its being threatened by its central bank printing of money and increasing the debt production problem. 

‘The United States is a 75-year-old empire and it is exhibiting signs of decline.’

MarketWatch: Focusing on the money and credit problem, excessive debt can be a killer for businesses and families, but most people don’t seem to recognize that debt plays havoc with their country’s finances as well. Government runs the money printing press, which buys time, but eventually something’s got to give.

Dalio: If you look at the history — for example, the Dutch Empire, the British Empire — both experienced the creation of debt and the printing of money, less educational advantages, greater internal wealth conflict, greater challenges from rival countries. Every country has stress tests. If you look at British history, the development of rival countries led them to lose their competitive advantages. Their finances were bad because they had accumulated a lot of debt. So, after World War II those trends went against them. Then they had the Suez Canal incident and they were no longer a world power and the British pound is no longer a reserve currency.  These diseases almost always play out the same way.  

The United States’ relative position in the world, which was dominant in almost all these categories at the beginning of this world order in 1945, has declined and is exhibiting real signs that should raise worries. There’s a lot of baggage. The U.S. has a lot of debt, which is adding to the hurdles that typically drag an economy down, so in order to succeed, you have to do a pretty big debt restructuring. History shows what kind of a challenge that is.

I just want to present understanding and facts. There’s a life cycle. You’re born and you die. As you get older you can see certain things that are symptoms of being later on in life. To know the life cycle and to know that these symptoms are emerging is what I’m trying to convey. The United States is a 75-year-old empire and it is exhibiting signs of decline. If you want to extend your life, there are clear things you can do, but it means doing things that you don’t want to do.

‘Wealth cannot be created by creating debt and money.’

MarketWatch: Let’s put it bluntly: Is capitalism broken?

Dalio: I wouldn’t say broken as much as I’d say it has problems that have to be fixed. As I said, I’m not ideological, I’m mechanical. I look at everything operationally like a machine and what has been shown is that capitalism is a fabulous way of creating incentives and innovation and of allocating resources to create productivity. All successful countries have uses for it. For example, communist China has chosen capitalism, which has been essential to its growth.

But capitalism also produces large wealth gaps that produce opportunity gaps, which threaten the system in the ways we are seeing now. Wealth gaps give unfair advantages to the children of rich people because they get a better education, which undermines the equal opportunity notion. As the number of people who get equal opportunity diminishes, this reduces the possibility of finding talented people in that population, which isn’t fair and undermines productivity. Then the have-nots want to tear down the capitalist system at a time of bad economic conditions. That dynamic has always existed in history and it’s happening now. 

The capitalist system is based on profit-seeking being the resource allocation system, which generally works well but doesn’t always. So, capitalism and capitalists are good at increasing and producing productivity to increase the size of the economic pie, but they’re not good at dividing the economic opportunity pie. Socialists are generally not good at increasing productivity and the size of the economic opportunity pie, but they are better at dividing the pie. 

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Jonathan Burton is the investing editor for MarketWatch and covers investing strategies and mutual fund-related news from San Francisco. He also writes the...

Jonathan Burton is the investing editor for MarketWatch and covers investing strategies and mutual fund-related news from San Francisco. He also writes the "Life Savings" column. Previously he held contributing editor positions at Bloomberg Personal Finance, Mutual Funds and Individual Investor magazines, and was a reporter with the Far Eastern Economic Review and Investor's Business Daily. He is also the author of two books on investing.

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